How Multinational Companies Actually Re-Wrote Britain's Tax Code

We live in austere times, and yet the budget this week will be a
bonanza for big business. For all the chancellor's rhetoric about
clamping down on tax dodging as a quid pro quo for abandoning the
50p tax rate, some of the biggest handouts will be in tax cuts
and tax-avoidance-made-simple for multinationals.

But this is no surprise, given that the multinationals themselves
have been closely involved in rewriting the tax rules.

The budget will usher in major changes to the way UK-based
multinationals are taxed on profits from their overseas
subsidiaries, as well as huge cuts in corporation tax. Over the
lifetime of this parliament, about £20bn will be lost in tax
receipts as a result, according to the Treasury's own estimates.

By the time George Osborne's cuts to corporation tax – from 28%
when the coalition took power, to 23% by 2015 – have been phased
in, they will have resulted in losses of more than £5bn a year to
the revenue. A further cut – to just 20% – was floated this
month.

In addition to these losses in revenue, the exchequer will be
deprived of close to £1bn a year by 2015 in taxes on foreign
subsidiaries. The tax changes involved – to the controlled
foreign companies rules – are so complex and arcane, much of the
proposed cuts to taxing offshore profits have slipped in under
the radar.

The Treasury argues the reforms are necessary to stimulate growth
and to make our corporate tax system "more competitive". But this
is a race to the bottom. The changes will encourage
multinationals to shift more of their business to tax havens.
There is no benefit to small- and medium-sized British companies.
The reforms represent a triumph of corporate regulatory capture,
begun under the last Labour government and accelerated under this
one.

The technical bits are as follows: under old controlled foreign
companies rules, if a British company (currently liable for a
corporate tax rate of 26%) has subsidiaries overseas – in Ghana,
say (tax rate 25%) and Switzerland (tax rate 8%) – and it chooses
to shift profits out of the territories with the higher tax rates
to the lowest tax haven rate, the UK would tax its profits on the
difference between what it pays in Switzerland and the UK rate.
This avoids companies being taxed twice on their profits, but
also acts as a disincentive to shifting to tax havens, since it
would end up paying much the same as if it left the profits in
Africa.

The budget will bring in new exemptions, so that the CFC rules
only apply if the tax haven subsidiary can be shown to have most
of its dealings with the UK. So under the new rules, if a company
transfers ownership of its brands from Ghana to Switzerland, its
profits on those brands won't be subject to UK tax. It now has
every incentive to shift its profits to the tax haven. The
charity ActionAid estimates this could cost poorer countries
£4bn a year in tax. Rubbish, says the Treasury, offering no
impact assessment of its own.

So far, so New Labour: these reforms began on its watch. But the
new goodie given the go-ahead by Osborne is a further exemption
which will reduce multinationals' tax bills dramatically: the
exemption on profits of offshore finance company subsidiaries.

If a UK-based multinational sets up a treasury company in
Switzerland and puts equity into it from the UK, which is then
passed on in loans to its other subsidiaries to run its
operations, with interest on the loans flowing back in profits to
the tax haven. The tax rates on these profits will be a maximum
of just one-quarter of the current UK rate.

These new policies have been written by multinationals. Labour
established a series of working groups to consult on the CFC reform made up almost
entirely of tax directors from businesses with large numbers of
offshore subsidiaries.

The monetary assets working group, for example, consisted of
Vodafone, Shell, Diageo, Tesco, G4S,
International Power and BHP Billiton. The intellectual property group
included Kraft, GlaxoSmithKline, Associated British
Foods, Cable & Wireless, and the insurance working group had
Aviva, RSA, XL Group, Prudential, Lloyds and AIG. The banking group came from banks
including Barclays, which is famous for sophisticated tax
avoidance.

Under the new coalition government, a senior manager in
international corporate tax from accountants KPMG, Robert Edwards, was seconded to the Treasury for 20 months
to see through developing the policy on CFC rules. His speciality
at KPMG? Advising multinationals on tax-efficient cross-border
financing and restructuring.

With stakeholders like this, it's no surprise that tax justice
protesters have taken to direct action and occupation.